Business Context and Reporting Period
BT Brands, Inc. operates ten quick-service restaurants in the North Central United States: nine Burger Time locations and one Dairy Queen location. The company focuses primarily on drive-through and take-out service. This Form 10-Q covers the 13 and 39 weeks ended September 27, 2020, compared with September 29, 2019. The filing was signed November 9, 2020.
BT Brands is a smaller reporting company and emerging growth company. It reported 8,095,004 common shares outstanding as of November 8, 2020.
Financial Performance and Position
| Metric | 13 weeks ended September 27, 2020 | 13 weeks ended September 29, 2019 | 39 weeks ended September 27, 2020 | 39 weeks ended September 29, 2019 |
|---|---|---|---|---|
| Sales | $2.374 million | $1.850 million | $6.074 million | $5.116 million |
| Income from operations | $355,865 | $101,838 | $626,244 | $(19,587) |
| Income before taxes | $339,184 | $28,627 | $1.049 million | $(179,551) |
| Net income | $254,184 | $28,627 | $815,362 | $(179,551) |
| Basic and diluted earnings per share | $0.03 | $0.00 | $0.10 | $0.00 |
- Third-quarter sales increased 28.3%; nine-month sales increased 18.7%.
- Third-quarter net margin was 10.7%, compared with 1.5% in the prior-year period. Nine-month net margin was 13.4%, compared with negative 3.5%.
- Operating margin improved to 15.0% from 5.5% in the third quarter and to 10.3% from negative 0.4% for the nine-month period.
- Restaurant-level EBITDA, a non-GAAP measure excluding corporate general and administrative costs, depreciation and amortization, and impairment charges, was $596,825, or 25.1% of sales, in the third quarter and $1.138 million, or 18.7% of sales, for the first 39 weeks. The filing cautions that this measure is not a substitute for GAAP operating income.
- Cash was $1.393 million at September 27, 2020, compared with $258,101 at December 29, 2019. Working capital was $371,190, versus a year-end working-capital deficit of approximately $468,000.
- Net cash provided by operating activities was $1.389 million for the first 39 weeks, compared with $158,970 in the prior-year period. Investing activities provided $46,264, while financing activities used $300,066.
- Total debt, including current maturities and before unamortized debt issuance costs, was $3.297 million; current maturities were $240,680 and long-term debt, net of issuance costs, was $3.001 million.
- Total assets were $3.522 million and total liabilities were $4.103 million. Shareholders’ deficit improved to $580,953 from $1.396 million at year-end, primarily because of year-to-date net income.
Material Changes Versus the Prior Comparable Period
- Sales benefited from increased drive-through demand during COVID-19-related dining restrictions, favorable weather, and a menu price increase that management estimated contributed approximately 5% to 10% to third-quarter sales.
- Third-quarter food and paper costs declined to 36.4% of sales from 39.3%, supported by a six-month fixed price for ground beef patties at approximately $2.51 per pound.
- Third-quarter labor costs declined to 26.3% of sales from approximately 30.5% to 30.8%, reflecting leverage from higher sales and stable staffing. General and administrative expense increased 38.8%, primarily because of a CEO bonus and higher CEO compensation.
- For the first 39 weeks, general and administrative expense declined 11.2% to $371,455, while depreciation and amortization declined 18.1% to $140,588.
- The company recorded a $100,000 impairment charge on property held for sale during the first 39 weeks, compared with $93,488 in the prior-year period.
- The company repaid in August 2020 an $8% related-party note with a balance of approximately $207,729 and repaid its notes receivable from Next Gen Ice, including interest. The company retained an investment in Next Gen Ice valued at $75,000.
- Debt declined from $3.558 million at year-end to $3.297 million at September 27, 2020, despite the addition of a $27,500 Minnesota emergency loan. The reduction included repayment of the related-party note.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management stated that it expects sufficient cash to meet obligations for at least the next twelve months and prepared the financial statements on a going-concern basis.
- The company received $460,400 in PPP loans and recorded the expected forgiveness as other income. Forgiveness remained subject to the applicable program requirements and submitted documentation.
- The company also borrowed $27,500 under the Minnesota Small Business Emergency Loan Program at 0% interest. Up to 50% may be forgivable under certain conditions; repayment was scheduled to begin December 15, 2020.
- COVID-19 caused product and labor shortages and restricted indoor dining, but management reported that drive-through demand had a favorable effect through the reporting period. The filing states that future closures, regulations, consumer behavior, and financial effects remain difficult to predict. Subsequent temporary closures were reported at the Moorhead and Minot locations because of employee COVID-19 cases.
- Management intends to pursue acquisitions of multi-unit restaurant concepts and individual restaurant properties, potentially at attractive valuations following the pandemic. No specific acquisition guidance, transaction, or financing commitment was provided.
- Key operating risks include commodity price volatility, labor availability and wage increases, adverse weather and seasonality, changing regulations, construction costs, economic conditions, and COVID-19 effects. The company estimates that a 10% increase in beef costs would add approximately $175,000 to annual food costs.
- Two mortgage lenders deferred payments for three months during the first half of 2020; deferred loans continued to accrue interest, which was added to principal.
- The company reported no significant pending legal proceedings, no defaults upon senior securities, and no off-balance-sheet arrangements.
Important Facts for Investors to Verify
- Verify final PPP loan forgiveness and the related tax and accounting treatment.
- Assess whether COVID-19-related drive-through sales gains and margin improvements are sustainable after restrictions ease.
- Review debt maturities, lender payment terms, collateral, shareholder personal guarantees, and compliance with loan covenants.
- Evaluate the recoverability and potential sale proceeds of the Richmond, Indiana property and other assets held for sale, including the $100,000 impairment charge.
- Reconcile the filing’s reported working-capital increase, which is described inconsistently in different sections, with the underlying balance-sheet figures.
- Monitor commodity prices, particularly beef, labor costs, staffing availability, minimum-wage changes, and potential store closures.
- Determine whether the company can execute its acquisition strategy without materially increasing leverage or diluting shareholders.